Bond Industry Blames the Victim, Moberly, in the New York Times

In connection with a larger story about municipal debt incurred without a vote of the people or any public oversight at all for that matter, the NYTimes did a small story on the Mamtek fiasco in Moberly.

But municipal bond market participants say they were shocked, too, by how quickly the city of about 14,000 would walk away from a solemn promise to guarantee the debt payments through 2025, the life of the bonds.

Cities like Moberly that guarantee debts for entities that borrow for projects like parking garages and hockey arenas often “don’t understand that they are responsible for making these payments,” said Matt Fabian, managing director of Municipal Market Advisors, a research and consulting firm. However, he said, “It’s as if your kid runs up a $400 cellphone bill. You can’t get out of paying it by saying you didn’t authorize that.”

Nearly as bad:

When the city’s guarantee was called, the Moberly City Council issued a statement saying: “The city’s taxpayers, under these circumstances, should not bear the burden of Mamtek’s failures or be asked to ‘bail out’ their shareholders or investors.”

But the bond market saw the failure as Moberly’s. Standard & Poor’s cut the city’s own credit to junk status, dropping it a rare nine notches, from A to B, even on debts that had nothing to do with the sweetener plant. (The bonds for the plant went from A-minus to D.) Market analysts warned that Moberly’s failure to pay might tarnish the credit of other towns in Missouri. Stormy hearings followed in the statehouse, with bankers and analysts testifying that the whole deal had rested on the credibility of Moberly’s guarantee, not the Chinese company’s prospects.

After spending probably hundreds of hours investigating, reporting on, and then trying to make sure something like Mamtek never happens again, I think by now I’m a bit of an expert on the deal. More of an expert that Matt Fabian. If I’d have been asked to comment on Moberly’s default, here’s what I would have said:

Did Moberly make mistakes? Absolutely. They committed too much money too quickly. But it’s hard to blame them. They heard the promise of 600 jobs from DED and were told they had to move forward quickly. As a community of just 12,000 people they knew they didn’t have the resources to investigate the validity of Mamtek’s business model so they did the prudent thing: they hired experts to conduct due diligence and advise them that this was a good move for the city. Those experts didn’t do their jobs.

The city’s biggest mistake wasn’t backing the bonds, it was relying on the expertise of bond professionals they hired and the oversight of state government. Moberly thought the bond professionals it hired and DED were looking out for them. In truth, the bond professionals and DED weren’t doing much of anything. In the end, the Mamtek fiasco was caused by a noxious combination of inadequate government oversight by the Department of Economic Development and the complete abrogation of professional duty by America’s bond industry.

The NYT article cites to Standard & Poor’s decision to downgrade the debt. But it was Standard & Poor’s that rated the Mamtek bonds as investment grade material. Without S&P’s stamp of approval, the city would have never approved the bonds. Two years later, S&P and others say the bonds were backed solely on the credit of the city of Moberly. Our investigation revealed something else.

At the time of the bond offering, Moberly had annual revenues of approximately $7 million and had run at a deficit the two prior years. Yet here they were asking for a loan of $39 million on a 15 year note. At the hearings, I asked several witnesses, “If I made $70k a year and had run in the red the previous two years would you loan me $390k to be repaid within 15 years?” Everyone’s answer was, “(Hemming and hawing, oh well that’s different and then finally after being asked to answer the hypothetical) no probably not.”

A colleague of mine asked a similar question, “If Moberly had decided to pave a few streets with gold and asked you for a $39 million loan on that project, would you have approved it?” If the underlying project didn’t actually matter and it was just about Moberly’s credit, then the answer should have been yes. Of course, the answer wasn’t yes because the underlying project did matter.

Documents produced for the committee showed some bond professionals gave Moberly officials the impression that they were looking into the details of Mamtek’s operations. One memo noted that the bond underwriter and its counsel would “conduct properly their due diligence review of the organization, operations, and financial condition of” Mamtek U.S., Inc.”

It should not be left out that the Department of Economic Development had information from its own consultant in China that Mamtek had reneged on a nearly identical financing arrangement it had forged with Wuyishian City, Fujian Province, China. Here’s what the contractor told the Department:

We found (Mamtek’s) plant in Fujian Province, China, never started to manufacture. In 2007, their investment project was approved by Wuyishan City, Fujian. As the initial agreement, local government build the facility and all facility for Mamtek, while Mamtek will rent the facility in the beginning and will finally purchase the facility. The planned investment capital is 20 million USD, which will be invested by three phases. In 2008, although most of the facility was built, Mamtek still didn’t start manufacturing. One of the reasons is the protest from local conservation department, who insisted that the project is a kind of fine chemical industry, which should not be set in this zone. In 2009, Mamtek made the deal with local government and agreed to move out (they never started) and so far there is no other news about the new location in China.

Again, unfortunately, that information was never shared with the people of Moberly.

Now, nearly a year after the deal went bust for good, the people of Moberly find themselves being maligned in the august pages of the New York Times by guys like Matt Fabian, who I’m sure is smarter than you and I put together and a nice guy if you get to know him, but who also spouts off without knowing the actual facts of a situation. His analysis is no better than the drive-by due diligence and rating efforts put forth by the bond underwriter and Standard & Poor’s.

Fabian compares Moberly to the parents of a teenager who racks up a $400 charge on the cell phone. “You can’t get out of it by saying you didn’t authorize that.” Actually, I think some cell phone and other communications companies have policies relaxing payment requirements for parents in some situations. But, to be fair, maybe we should use Fabian’s example – except add a few details. In this case, the parent was told by a third-party that the third-party would pay the bill and more – and the parents then hired an expert to tell them whether the third-party could actually do what they promised. Only after getting the promise from the third-party and the assurance from an expert they paid did the parents let the kid actually use the phone.